Variance and Interest Rate Risk in Unit-Linked Insurance Policies

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2020
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Abstract
One of the risks derived from selling long-term policies that any insurance company has arises from interest rates. In this paper, we consider a general class of stochastic volatility models written in forward variance form. We also deal with stochastic interest rates to obtain the risk-free price for unit-linked life insurance contracts, as well as providing a perfect hedging strategy by completing the market. We conclude with a simulation experiment, where we price unit-linked policies using Norwegian mortality rates. In addition, we compare prices for the classical Black-Scholes model against the Heston stochastic volatility model with a Vasicek interest rate model.
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Authors David Baños;Marc Lagunas-Merino;Salvador Ortiz-Latorre;Baños, David;Lagunas-Merino, Marc;Ortiz-Latorre, Salvador;
Journal risks
Year 2020
DOI
10.3390/risks8030084
URL
https://www.mdpi.com/2227-9091/8/3/84
Keywords
unit-linked policies pure endowment term insurance stochastic volatility models stochastic interest rates unit-linked policies pure endowment term insurance stochastic volatility models stochastic interest rates

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